Poland: Concluding Agreements With Insolvent Party

Last Updated: 21 October 2013
Article by Mateusz Medynski and Piotr Zimmerman

Most entrepreneurs deal with a company in financial difficulties at some point of their business activity. In some cases, the entrepreneur is aware of the precarious financial condition of its contracting party; in others, this status is unknown to the entrepreneur at the moment of concluding an agreement. Many transactions are also conducted as means of assisting the contracting party with their financial difficulties, by providing additional financing to facilitate restructuring or by allowing for an important project to be completed, thus providing funds to regain financial composure. In many cases, such assistance is granted by affiliates or members of the same financial group.

However, all these actions run the risk of being found ineffective towards the bankruptcy estate (ie, towards all creditors whose common interest is represented in bankruptcy proceedings) should the restructuring fail and the contracting party be declared bankrupt on the basis of provisions of Polish Bankruptcy and Restructuring Law.

The requirements for such actions to be declared ineffective towards the bankruptcy estate should be considered, so as not to risk already concluded agreements being undone by provisions of Polish law if one of the contracting parties was later declared bankrupt.

The mechanism of declaring certain actions of the debtor before it was declared bankrupt as ineffective towards the bankruptcy estate (ie, towards all creditors of the debtor) aimed to combat last-minute transfers of assets of the debtor so as to remove such assets from future enforcement, to the detriment of the creditors.

In general, the Bankruptcy and Restructuring Law states that all actions that result in the disposal of the bankrupt party's assets taken within one year of filing the motion for the declaration of bankruptcy are ineffective towards the bankruptcy estate, provided that such actions were gratuitous or that the stipulated value of the consideration of the other contracting party greatly exceeded the consideration of the bankrupt party. The contracting party must return whatever it received as a result of the ineffective action to the bankruptcy estate; in return, it can claim its receivable in the bankruptcy proceedings (along with the rest of the creditors).

Moreover, the securing and repayment of debt that was not yet outstanding that is carried out within two months before the motion for the declaration of bankruptcy was filed is also ineffective.

A special provision concerning transactions with entities closely connected with the bankrupt party also applies, which can be of particular irritation to capital groups, as they disrupt intra-group relations. Even if concluded with fair consideration, all transactions between the bankrupt party and its spouses, close relatives, shareholders, their representatives or their spouses, as well as with affiliated companies (ie, those where another company holds directly or indirectly at least 20% of the shareholder votes), their shareholders, representatives or their spouses, are ineffective towards the bankruptcy estate under the law if they were concluded up to six months before the motion for the declaration of bankruptcy was filed. This provision also applies if either of the contracting parties was a dominant entity of the other party.

This list of actions subject to ineffectiveness is not exhaustive - other provisions cover establishing securities in the form of mortgages, pledges, registered pledges or maritime mortgages, awarding remuneration to bankrupt party's representatives or signing settlements or waiving claims - but the above conditions are among the most widely used in Polish bankruptcy proceedings and have a tendency to cause the most damage to foreign contractors of Polish companies.

Furthermore, in accordance with the EU Insolvency Regulation (1346/2000), as interpreted by the First Chamber of the European Court in Seagon v Deko Marty Belgium NV (C-339/07), the courts of the member state where the insolvency proceedings were opened have jurisdiction to decide on the ineffectiveness of a transaction by virtue of insolvency (although the law applicable in such a case varies from action to action).

However, should one deal with a Polish company whose financial status is unclear, it is useful to consider the possible risks and methods of countering them before any actions are taken, so as to be certain that possible future declaration of bankruptcy would not interfere with one's own business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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